2023 (4) TMI 270 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - Infobeans Technologies Ltd. (Infobeans) cannot be treated as comparable to the assessee as it is not functionally similar. Accordingly, we direct the AO to exclude this company from the list of comparables. Cybercom Datamatics Information Solutions Ltd. (Cybercom) company is engaged into diversified activities, including provision of software services. However, the segmental details relating to various segments are not available in public domain. Further, unlike this company, the assessee is not providing technical services. Thus , we direct the Assessing Officer to exclude this company as a comparable. Octaware Technologies Limited (Octaware) - Revenue earned during the years is from software development services. There is no other stream of revenue reported by the company. Thus, the contention of learned counsel for the assessee that the company is having more than one segment and is into development of products is not borne out from record. Further, it is relevant to observe, TNMM makes room for broad comparability. Considering the fact that this company is earning revenue from only one segment, viz., software services, we hold that it can be treated as a comparable to the assessee. Therefore, we do not find merit in the submissions of the assessee. Infosys BPO cannot be treated as comparable to the assessee.Undisputedly, the assessee is a purely captive service provider and minimal risk bearing entity. Whereas, Infosys BPO is a risk bearing entity having diversified activities. It has the advantage of Infosys brand name and has established itself as a front runner in the BPO sector - turnover of Rs.2323 crores reported by Infosys BPO compared to turnover of Rs.96 crores reported by the assessee makes the assessee a pigmy qua Infosys BPO. MPS Limited (MPS) - No doubt, this company forms part of the list of comparables selected by the assessee in its TP study report - in course of the proceedings before learned DRP, the assessee in its submissions has sought exclusion of this company citing various reasons. As could be seen from the directions of learned DRP, no discussion has been made on acceptability or otherwise of this company as comparable. We are inclined to restore this issue to the Assessing Officer to examine assessee s claim that the company cannot be treated as comparable. The assessee must be provided reasonable opportunity of being heard on the issue. TP adjustment - imputing interest on outstanding receivables - HELD THAT - As decided in assessee own case 2021 (11) TMI 1148 - ITAT DELHI assessee is a debt free company and has no claim of interest payable. Hence, in the specific financial conditions of the assessee, we hold that no adjustment is required on this ground. We restore this issue to the AO for verifying assessee s claim, keeping in view the decision of the Tribunal in assessment year 2015-16 (supra) after providing reasonable opportunity of being heard to the assessee. This ground is allowed for statistical purposes.

Summary

Issues Involved:
1. Selection of comparables in the software development services segment.
2. Selection of comparables in the ITES segment.
3. Transfer pricing adjustment and imputing interest on outstanding receivables.
4. Incorrect computation of margins.

Issue-wise Detailed Analysis:

1. Selection of Comparables in the Software Development Services Segment:
- Infobeans Technologies Ltd.: The assessee objected to the selection of Infobeans Technologies Ltd. as a comparable, arguing that it is engaged in diversified activities, including the sale of software products, and lacks segmental details. The Tribunal noted that Infobeans is into the sale of software products and lacks segmental details in its financial statements. Citing previous decisions, the Tribunal directed the exclusion of Infobeans from the list of comparables.
- Cybercom Datamatics Information Solutions Ltd.: The assessee argued that Cybercom provides specialized IT solutions and consulting services, thus being functionally dissimilar. The Tribunal observed that Cybercom is engaged in diversified activities without segmental details in the public domain. It directed the exclusion of Cybercom from the list of comparables, referencing previous Tribunal decisions.
- Octaware Technologies Limited: The assessee contended that Octaware is into diversified activities and lacks segmental details. However, the Tribunal found that Octaware earns revenue solely from software development services and does not have multiple segments. Thus, it upheld the inclusion of Octaware as a comparable.

2. Selection of Comparables in the ITES Segment:
- Infosys BPO Ltd.: The assessee argued that Infosys BPO is functionally different, being a risk-bearing entity with substantial intangibles and a significantly higher turnover. The Tribunal agreed, noting that Infosys BPO has diversified activities, brand value, and a turnover of Rs.2323 crores compared to the assessee's Rs.96 crores. Citing previous decisions, the Tribunal directed the exclusion of Infosys BPO from the comparables.
- MPS Limited: The assessee objected to MPS Limited, arguing it provides publishing solutions and has developed software products, lacking segmental details. The Tribunal noted that the DRP did not discuss the comparability of MPS Limited. Thus, it restored the issue to the Assessing Officer for examination, providing the assessee an opportunity to be heard.

3. Transfer Pricing Adjustment and Imputing Interest on Outstanding Receivables:
- The assessee argued that the issue is covered by the Tribunal's decision in the assessee's own case for AY 2015-16, where no adjustment was required as the assessee is a debt-free company. The Tribunal restored the issue to the Assessing Officer for verification, considering the Tribunal's previous decision and providing the assessee a reasonable opportunity to be heard.

4. Incorrect Computation of Margins:
- Both parties agreed that the issue should be restored to the Assessing Officer consistent with the Tribunal's decision in AY 2015-16. The Tribunal directed the Assessing Officer to re-compute the margins, following the directions given in the previous decision and allowing the assessee to furnish necessary clarifications.

Conclusion:
- The Tribunal partly allowed the appeal, directing the exclusion of certain comparables, restoring issues for further examination by the Assessing Officer, and dismissing unpressed grounds. The order was pronounced on 19th January 2023.